ii view: NatWest being paid £125m to take Sainsbury's bank business
Shares in this supermarket operator and owner of Argos have comfortably underperformed rival Tesco year-to-date. We assess prospects.
20th June 2024 11:36
by Keith Bowman from interactive investor
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Core banking business offloaded to NatWest
Chief executive Simon Roberts said
"I am pleased to be announcing this news today. NatWest's values and customer focus are a close fit with ours and as one of the UK's leading banks, NatWest's scale and financial services expertise will ensure our existing financial services customers continue to be well looked after.
“There will be no immediate change for our bank customers as a result of this announcement. Today's news means we will focus all our time and resources going forward on growing our core retail business, delivering great quality and value, week in week out."
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ii round-up:
Supermarket chain Sainsbury (J) (LSE:SBRY) today confirmed the sale of its core banking business to NatWest Group (LSE:NWG) for an undisclosed sum, with the deal expected to complete in the first half of 2025.
The sale includes personal loans, credit cards and retail deposit businesses but excludes its commission income businesses, including insurance, ATM machines and travel money. Core banking generated adjusted pre-tax profit of £7 million in the year to early March, with annual revenue for the wider financial services business coming in at less than 2% of the company total. The portfolio of business will be transferred to NatWest at a £125 million discount to book value.
Shares in the FTSE 100 grocer rose 1% in UK trading having come into this latest news down around 14% year-to-date. Tesco (LSE:TSCO), which previously agreed a similar deal with Barclays (LSE:BARC), is up 6% in 2024, similar to the FTSE 100 index itself.
The deal with NatWest also excludes Sainsbury’s Argos Financial Services (AFS) business. Plans for this operation are expected later.
The banking deal is expected to see £250 million returned to shareholders once it completes and once the future of AFS is decided upon.
Sainsbury's previously offered a full-year estimate for financial services trading profit for the year to March 2025 of anything up to £15 million
The City expects minimal profits from Sainsbury’s remaining financial services businesses post this deal.
Sainsbury's is due announce a first-quarter trading update on 2 July.
ii view:
Started in 1869, Sainsbury today operates around 600 supermarkets and 800 convenience stores. Its acquisition of Argos in 2016 leaves it with the UK’s third most visited website. Along with Sainsbury itself, other group brands include Habitat, Tu and Nectar. The retailer employs around 148,000 people.
For investors, the difficult backdrop for its customers including higher borrowing costs cannot be overlooked, and competition across the sector remains intense. General Merchandise sales fell 0.5% during its last financial year when including the closure of Argos in the Republic of Ireland, while group net debt of £5.55 billion including leases compares to a stock market value of £6.3 billion.
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More favourably, the sale of core banking leaves management more focused on the performance for retail. Underlying operating profit for retail is forecast by Sainsbury's to grow by 5-7% this current financial year compared to the last. Moves to take Argos stores into its supermarkets have helped reduce operating costs by more than 3% of sales since 2019/20, while a price-to-net asset value of under one compares to values of over five at Amazon.com Inc (NASDAQ:AMZN), B&M European Value Retail SA (LSE:BME) and Greggs (LSE:GRG), suggesting the shares are not expensive.
For now, and despite ongoing risks, self-help initiatives and a forecast dividend yield above 5% are likely to leave this retailer on the radar of both income and growth investors.
Positives:
- A cost saving programme ongoing
- Attractive dividend payment (not guaranteed)
Negatives:
- Elevated costs
- Intense sector competition
The average rating of stock market analysts:
Cautious buy
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